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EU “blacklist”, Cayman Islands and DAC6

  • United Kingdom
  • Tax planning and consultancy - DAC6

04-03-2020

On 18 February 2020, the Council of the EU added the Cayman Islands, along with Palau, Panama and Seychelles to its list of non-cooperative jurisdictions for tax purposes. These territories join eight other jurisdictions (namely, Fiji, Oman, Samoa, Trinidad and Tobago, Vanuatu, American Samoa, Guam and the US Virgin Islands) to bring the total number on the EU’s list to 12.

While the EU “blacklist” is part of the EU’s general strategy to promote good tax governance around the world, one of the immediate impacts of the latest developments is to create new potential reporting obligations under DAC6.

DAC6

DAC6 is an EU-wide regime which requires the disclosure of information relating to certain cross-border arrangements to the tax authorities of EU Member States. A cross-border arrangement may need to be reported where it contains one or more specific characteristics which are known as “hallmarks”. The hallmarks are characteristics which are broadly indicative of potentially aggressive tax planning. While the hallmarks generally relate to forms of tax planning, some hallmarks can be triggered without any tax benefit motive or any actual tax benefit being present.

One of the hallmarks which triggers reporting under DAC6 specifically relates to the EU blacklist. In particular, reporting may be required where there is an arrangement that involves “deductible cross-border payments made between two or more associated enterprises” where the recipient is tax resident is a jurisdiction in included on the EU blacklist.

What is notable about the above is that this hallmark does not require the presence of any tax benefit or tax benefit motive in order for the relevant arrangement to be reportable. Accordingly, simply by virtue of the existence of the Cayman Islands (or any of the other blacklisted jurisdictions) in a structure or transaction which also involves another EU member state, a taxpayer and / or their advisors may be required to report under DAC6.

Penalties

Failure to report under DAC6 may result in financial penalties for intermediaries and/or taxpayers. In the UK, where there is a failure to comply, this can result in a once-off penalty of £5,000, however more serious cases can mean the imposition of daily penalties. In addition, where an arrangement involves a number of EU jurisdictions, consideration will need to be given to compliance obligations in each of those other jurisdictions as well as associated penalties which may be levied by the local authorities.

Next steps

As noted above, taxpayers should consider their position in relation to any legacy structures as well as any planned arrangements which might be caught by DAC6 in light of the latest developments. The EU blacklist is subject to ongoing revision so it is feasible that the Cayman Islands, or indeed any of the other jurisdictions on the list, could find themselves in a better position when the next planned update is published in October 2020.

Even if this were to happen however, a reporting obligation under DAC6 could still exist in respect of relevant arrangements involving the Cayman Islands from the date of the blacklisting until any delisting. In addition, consideration should still be given to the detailed provisions of DAC6 as an arrangement involving, for example, the Cayman Islands could potentially trigger a number of other hallmarks and therefore still create reporting obligations. By way of example, where there is a payment made to a recipient who is resident in a jurisdiction which does not impose corporate tax or imposes corporate tax at a rate of zero or almost zero, then reporting under DAC6 may still be triggered.

First reports under DAC6 will need to be filed in the UK by 31 August 2020. In the meantime, taxpayers should consider their affairs in order to ensure compliance with the new rules.

You can find out more information about what the 'blacklist' means for fund managers in our article, Cayman Islands Added to Annex 1: What Managers Need to Know.

For more detail on DAC6, please visit our hub.

On 18 February 2020, the Council of the EU added the Cayman Islands, along with Palau, Panama and Seychelles to its list of non-cooperative jurisdictions for tax purposes.  These territories join eight other jurisdictions (namely, Fiji, Oman, Samoa, Trinidad and Tobago, Vanuatu, American Samoa, Guam and the US Virgin Islands) to bring the total number on the EU’s list to 12. 

 

While the EU “blacklist” is part of the EU’s general strategy to promote good tax governance around the world, one of the immediate impacts of the latest developments is to create new potential reporting obligations under DAC6.

 

DAC6

 

DAC6 is an EU-wide regime which requires the disclosure of information relating to certain cross-border arrangements to the tax authorities of EU Member States.  A cross-border arrangement may need to be reported where it contains one or more specific characteristics which are known as “hallmarks”.  The hallmarks are characteristics which are broadly indicative of potentially aggressive tax planning.  While the hallmarks generally relate to forms of tax planning, some hallmarks can be triggered without any tax benefit motive or any actual tax benefit being present.

 

One of the hallmarks which triggers reporting under DAC6 specifically relates to the EU blacklist.  In particular, reporting may be required where there is an arrangement that involves “deductible cross-border payments made between two or more associated enterprises” where the recipient is tax resident is a jurisdiction in included on the EU blacklist.

 

What is notable about the above is that this hallmark does not require the presence of any tax benefit or tax benefit motive in order for the relevant arrangement to be reportable.  Accordingly, simply by virtue of the existence of the Cayman Islands (or any of the other blacklisted jurisdictions) in a structure or transaction which also involves another EU member state, a taxpayer and / or their advisors may be required to report under DAC6. 

 

Penalties

 

Failure to report under DAC6 may result in financial penalties for intermediaries and/or taxpayers.  In the UK, where there is a failure to comply, this can result in a once-off penalty of £5,000, however more serious cases can mean the imposition of daily penalties.  In addition, where an arrangement involves a number of EU jurisdictions, consideration will need to be given to compliance obligations in each of those other jurisdictions as well as associated penalties which may be levied by the local authorities. 

 

Next steps

 

As noted above, taxpayers should consider their position in relation to any legacy structures as well as any planned arrangements which might be caught by DAC6 in light of the latest developments.  The EU blacklist is subject to ongoing revision so it is feasible that the Cayman Islands, or indeed any of the other jurisdictions on the list, could find themselves in a better position when the next planned update is published in October 2020. 

 

Even if this were to happen however, a reporting obligation under DAC6 could still exist in respect of relevant arrangements involving the Cayman Islands from the date of the blacklisting until any delisting.  In addition, consideration should still be given to the detailed provisions of DAC6 as an arrangement involving, for example, the Cayman Islands could potentially trigger a number of other hallmarks and therefore still create reporting obligations.  By way of example, where there is a payment made to a recipient who is resident in a jurisdiction which does not impose corporate tax or imposes corporate tax at a rate of zero or almost zero, then reporting under DAC6 may still be triggered.

 

First reports under DAC6 will need to be filed in the UK by 31 August 2020.  In the meantime, taxpayers should consider their affairs in order to ensure compliance with the new rules.

 

For more detail on DAC6, please see our other updates [here].